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Why MercadoLibre's Second-Quarter Profit Problem Is Probably Just a Hiccup

Shares fell more than 10% on Friday after the Q2 report, but this e-commerce giant is still fundamentally strong.

In this segment from Motley Fool Money, host Chris Hill, Total Income's Ron Gross, and Supernova and Rule Breakers' David Kretzmann look beyond the headline numbers as they consider the investment thesis around the company known as the Amazonof Latin America. By nearly every metric, MercadoLibre (NASDAQ:MELI) grew at a healthy pace in Q2. But no business can control the direction of macroeconomic and political winds, and in one of its key markets, there's a storm in progress.

A full transcript follows the video.

This video was recorded on Aug. 4, 2017.

Chris Hill: MercadoLibre's second-quarter profits fell 18%, and the Wall Street darling fell out of favor if only for one day. Shares of MercadoLibre down more than 10% on Friday, although, you back it out over the past year, David, it's had quite a run.

David Kretzmann: It's had a good year. It's had a good three, five, 10 years. I don't think this is anything to worry about too much. When you take a high-level look of the business, things are still going really well. Items sold grew a record 41% for the quarter. Their payment transactions through their payments platform, MercadoPago, grew 63%. Total users on the platform up 21%, and almost 200 million users now. Revenue up 59%. Venezuela, though, continues to be a sore thumb area for them. They had to do a write-off with their business in Venezuela. This summer, Venezuelan Central Bank instituted a new foreign exchange mechanism which devalued the currency by 73% compared to the U.S. dollar. That hurts.

Ron Gross: That stings.

Kretzmann: That stings a bit. So, MercadoLibre is taking a $25 million loss this quarter. The one bright side there is, the more you write down the business, the smaller it gets. So, in general, things are still going well. Their gross margin is seeing pressure as they roll out a loyalty program and free shipping in Brazil and Mexico and a few other markets there. But they have such a big market opportunity, I think those are wise investments.